2014 was a terrible year for Barclays (LSE: BARC) (NYSE: BCS.US) and one that the bank is glad to put behind it. Indeed, regulators hounded the bank throughout the year, fining it for multiple issues and announcing multiple lawsuits against the group.
The low point of the year came in June, when the New York Attorney General filed a lawsuit against the bank. The lawsuit concerned Barclays’ “dark pool” trading venue. It has been claimed that the dark pool was favouring high-speed traders, which profit off other users transactions.
This accusation ripped Barclays’ reputation on Wall Street to shreds, and many high-profile customers turned their back on the bank.
Staging a recovery
Fast forward nine months to today and Barclays is starting to make a recovery. Although the bank’s investment banking division is still under performing, the rest of the group is doing better than many had expected.
According to analysts, after stripping out the investment bank, Barclays’ core businesses, namely retail banking and Barclaycard are trading 15% ahead of expectations.
What’s more, the group is making solid progress in its drive to cut costs and reduce leverage.
For example, the bank reported within its third quarter interim management statement that total operating expenses were down 7% compared to the year-ago period. As part of Project Transform, the bank reduced its headcount by around 7,800 in the 12 months to September 2014. Additional job cuts are on the cards so it’s likely that the bank’s operating expenses will have fallen further by the time the bank reported full-year 2014 results.
Moreover, now Barclays has sold off its loss-making Spanish business, the group’s Tier 1 capital ratio should be in the region of 10.4%. This is above the regulatory minimum and slightly above average for the global banking sector.
At the end of the third quarter, Barclays also announced an 8p per share increase in the bank’s net tangible asset value from June 2014 to 287p. So at present levels, Barclays is trading below the value of its tangible assets.
And with the bank’s core divisions all trading ahead of expectations it is likely that the bank will unveil improved book value, capital and profitability metrics when the bank reports 2014 full-year Results on 3 March 2015.
Undervalued
With the above in mind, Barclays looks to be seriously undervalued. The bank is putting its troubles behind it and is now focused on growth.
According to City forecasts, the bank’s earnings per share are set to grow 23% for 2014, 26% during 2015, and then 17% during 2016. EPS of 20.5p are expected for 2014, followed by 25.8p for 2015 and 30.2p for 2016.
These figures indicated that Barclays is trading at a forward — 2015 — P/E of 9.8, which is far too low.
Indeed, with EPS growth of 26% expected next year Barclays is currently trading at a PEG ratio of 0.4. In fact, if Barclays’ valuation were to increase, in order to reflect the bank’s projected growth, Barclays should be trading at a forward P/E of 26, not 9.8.
On that basis then, Barclays’ shares could be worth in excess of 600p.
